Things look bright for Time Warner Cable (NYSE: TWC). The company has been performing well even though the economy looks fairly weak. Let's analyze the stock from an investor's standpoint and see whether it deserves a place in your portfolio.
A look at the performance
The second quarter turned out to be a good one for Time Warner Cable. The top line rose by 4.4% as revenues from segments such as residential services, business services, and advertising increased. The quarter saw not only an increase in the number of subscribers but also a rise in average revenue per subscriber because of price increases.
And this isn't a one-off. Over the past five years, revenue has nearly doubled, and the company has a war chest of $3.51 billion in cash on its books. And while Time Warner Cable is reinvesting in its core business, it continues to generate strong cash flows. The company was able to return more than $1 billion to its shareholders, of which $863 million came from share repurchases and $163 million came from regular dividends. Despite a sluggish economy and intensifying competition, the company has been performing well and its core business is looking healthy.
What's going on?
At the moment, expansion plans seems to be the name of the game for Time Warner Cable. Earlier this year, the company acquired NaviSite, which helped the company's business-services revenue grow by 35%. It's also focusing on acquiring some cable systems in Kentucky and western Tennessee and has entered into an agreement with NewWave Communications. That's not all, though. Just about a month ago, Time Warner Cable also acquired Insight Communications, making it the second-largest cable television company in the United States, after Comcast (Nasdaq: CMCSA).
The company is highly levered, with a debt-to-equity ratio of 304.8%, so that's something to keep an eye on. However, Time Warner Cable maintains a decent interest coverage ratio of just under 3, so for now it's able to service its interest obligations.
Valuation
Let's look at the company from a comparative landscape to get a better idea of its worth. The stock is currently trading at a P/E multiple of 15.9. Does it provide value for the money? Let's see:
| Company |
Forward P/E |
PEG |
|---|---|---|
| Time Warner Cable |
13.18 |
0.80 |
| Cablevision Systems (NYSE: CVC) |
12.43 |
0.85 |
| Comcast |
12.38 |
0.85 |
| DirecTV (Nasdaq: DTV) |
11.73 |
1.39 |
Source: S&P Capital IQ.
A look at the forward P/E tells me the stock's value is more or less in line with that of its peers. However, if we consider the PEG ratio, which also takes into account the growth rates, TWC seems to be trading a bit cheaper than its peers. For growth stocks, a PEG below 1 suggests that we could be looking at a bargain.
The Foolish bottom Line
Time Warner Cable is fighting its battle valiantly against the sluggish economy and growing pressure from its competitors. The operational performance shows an upward trend, and the industry outlook for the coming year is bright as analysts expect annual growth of 15.8% over the next five years. Well-thought-out growth plans, strong operational performance, and a tasty valuation keep me interested in the stock. What about you?
